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Exit of Rubin marks end of a buoyant era


May 14, 1999 -- TOGETHER with his deputy, Lawrence Summers, and Alan Greenspan, the US Federal Reserve chairman, Robert Rubin, the US treasury secretary, has over the past four years formed a team akin to the legendary Three Musketeers, playing a decisive role in laying the groundwork to maintain the momentum of the longest US economic expansion in the post-war period.

His equally important achievement was his ability to tame the global financial crisis, preventing it from hitting US shores and dragging the world's economy down with it.

His departure, effective on July 4, will bring to an end a spectacular era, in which the spirit of free markets has unquestionably reigned supreme in the conduct of the Clinton Administration's economic and financial policies.

From his command centre on the third floor of the US Treasury, where he and Summers share a suit facing the Washington Monument, Rubin has won praise for his skills at marrying international finance and foreign policy. A wonder boy who ran Goldman Sachs' arbitrage operations, he left the Wall Street firm after 26 years of dedicated service to join the Clinton Administration as chairman of the National Economic Council before becoming the treasury secretary.

At the treasury, Rubin runs the organisation ''more like an investment bank,'' quipped Tim Geithner, the undersecretary for international affairs.

He enjoys debating with his staff and eliciting opinions from them rather than taking their straight recommendations. His legacy is the present strong US economic expansion, which has brought unprecedented prosperity to Americans. This can be traced back to the 1993 deficit-reduction plan, which was one of Clinton's campaign promises that Rubin helped navigate through Congress. The fiscal discipline created the first budget surplus in 29 years, helping Greenspan to bring down interest rates and give the economy a good kick-start.

Then Rubin, Greenspan and Summers let the free markets work their way. The reinventing of US businesses, which were in trouble throughout the second half of the previous decade, has strengthened their competitiveness.

Innovations and the advance of technology have brought down the cost of doing business. High-tech companies have paraded into the stock market to fuel the spectacular rise of share prices. US financial institutions are also the strongest and most competitive in the world. The Americans look invincible, with rising living standards. Everything they do is right. On the contrary, what the Japanese, and the rest of Asia, have been doing or preaching are wrong.

The success of Rubin, Greenspan and Summers ''has turned them into a kind of free-market Politburo on economic matters.'' The three, Greenspan in particular, have faith in the free market and have an appetite for analysis of the markets, which they believe will be correct in the end. To Greenspan, ''markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct.'' Time, Feb 15, 1999, Page 37).

In real life, however, the markets can be imperfect due to the involvement of human emotions and a host of other factors. Rubin would set out to tame the market like a man riding a tiger's back.

The Thai crisis was no surprise to Rubin and his team. For two years before the Bank of Thailand floated the baht in 1997, Greenspan and Rubin had been watching the narrowing of the spread between US government bonds and the emerging-market bonds with disquiet.

Banks were lending money to countries like Thailand or Malaysia at rates close to the US treasuries. In other words, Thailand and Malaysia were not riskier than the US. That was impossible. Rubin and Greenspan believed that a correction would be inevitable, though they could not imagine that it would become an Asian contagion.

The Asian crisis took its roots from the lending spree unleashed in the emerging-market region after the collapse of the New York stock market on Black Monday, October 19, 1987. The capital flow created unprecedented economic growth in Asia, reinforcing the myth of the Asian miracle.

Thailand got into problems in the early 1990s when it began to liberalise financial markets amid poor corporate governance and lax supervision of the financial system. The easy money loaned to Thai companies and banks went into land and stock-market speculation and more importantly fuelled the industries with over-investment.

To make matters worse, the inflexible exchange-rate policy could not cope with the over-valuation of the baht, pegged to the rising dollar since mid-1995. A correction would come to pass. In the case of Thailand, it was handled badly. Foreign-exchange reserves were depleted in the baht defence between late 1996 and the first half of 1997. When the Bank of Thailand floated the baht on July 2, it triggered a regional contagion, which at one point threatened to bring down other parts of the world.

From the outset, Rubin took an emotionless interest in the Thai crisis. If Thailand needed help from a bail-out of the International Monetary Fund, in which the US has a big say, it would have to fully disclose its foreign-exchange swap contracts to the global financial markets.

At that point, the Thai central bank was locking horns with US hedge funds, which had taken massive bets against the Thai baht through the foreign-exchange swap contracts. In total, the Thai officials built up US$30 billion in swap contracts to defend the integrity of the baht peg. Making public this sensitive information was tantamount to revealing to your enemies movements of your troops and strategic supplies.

Losing all the reserves from the gruelling defence, Thai officials finally gave in because the message from Washington was clear that without revealing the swap contracts the IMF would not step in to help Thailand out. After the swap contracts were disclosed a few days before Thailand entered the IMF programme in August 1997, the financial markets panicked with a big cry that Thailand was insolvent.

From Washington, Rubin and Summers played a key role in overseeing the formation of the bail-out package for Thailand. They underestimated the crisis, believing that confidence would be quickly brought back once Thailand was willing to embrace a strong dose of fiscal and monetary tightening, followed with structural reforms in the financial and economic sectors.

By the way, Rubin already had experience from dealing with the Mexico peso crisis. The Thai package, as it turned out, was modelled after the Mexican bail-out. Mexico, which suffered the crisis in 1993, recovered quickly because it had a big brother in the north to absorb its exports. Unfortunately for Thailand, Japan was too weak to pull Thailand out of the crisis because it was still in the middle of a economic recession, which had started in 1990. Other regional economies, which depended on Japan, were also in trouble. The collapse of Asia would be spectacular, from Thailand, to Korea and Indonesia.

Much of the criticism of the early rescue package for Thailand centred on the requirements of fiscal tightening at a time when the economy was contracting fast. Yet a classic IMF programme is to squeeze the economy to the core and get rid of all the fat before the body of the economy can recover again from a return of confidence or capital inflow.

Of course, Rubin would not accept this mistake of prescribing too harshly these conditions on Thailand in the initial period. The general sentiment among the US policy-makers was that Thailand's and other Asian nation's elite should be punished for their crony capitalism and nepotism. The harsh terms in the programme would wipe out all the Thai banks and big corporations saddled with foreign debts that they could not repay. If Thailand was to emerge again, it would be through better governance, democracy and support from the middle-class. Then the free-market would work again.

However, the Rubin-designed package for Thailand was completed without the US government having to contribute a single dollar. Most of the money came from the IMF, the World Bank, Japan and other neighbouring countries. The US stood at the sidelines, looking at Thailand as an isolated problem.

In the meantime, the Asian crisis proved to be a great benefit to the US since it helped to cool inflation from cheaper exports, while the American economy was riding on the strong-dollar policy in an upsurge cycle. Otherwise, Greenspan would have had to tighten his grip on the monetary policy.

It was no secret that relations between Bangkok and Washington were rocky during the Chavalit government. At one point, the IMF threatened to withdraw support for Thailand, a factor that led to the downfall of Chavalit Yongchaiyudh as prime minister.

When the Democrats came to power in November 1997, relations were quickly restored with the US. Tarrin Nimmanahaeminda, the finance minister, set winning confidence from the G-7 countries as a priority, most particularly the US, which were the big creditors of Thailand and the region. Tarrin made his way to Washington and held talks with Rubin and other top officials. He also received the honour of meeting President Bill Clinton, who was concerned about Thailand's misgivings over the US.

Only when the crisis in South Korea broke out in December that same year, when Korean banks and corporations were on the verge of defaulting on their massive foreign loans, did Rubin start to act. For Korea represented closer strategic interests to the US.

Almost single-handedly, Rubin arranged a meeting between the international bankers and the Koreans to work out a debt rescheduling. That helped to avert the global crisis, but it would not prevent Korea from seeking a larger bail-out package from the IMF.

Tarrin got along well with Rubin, for they spoke the same language and shared a similar financial background. After Summers made his way to Bangkok and said some soothing words in late January 1998, when overreaction brought the baht down to a record low of Bt56 to the US dollar, sentiment began to improve.

Yet recovery was still not in sight because of the fragility of the financial system and the debt overhang. When Rubin travelled to Thailand in mid-1998, making a spin-off trip from China, he did not pretend that Thailand would graduate from the crisis conveniently without further hard work at reform. At a time when the IMF was fiercely criticised for prescribing very harsh conditions on Thailand, Rubin stood firm behind the IMF, saying that the overall rescue package for Thailand was adequate.

He said the problems of Thailand and other crisis-hit economies were difficult and complex and had no easy answers or guarantees.

Asked by Fortune (Sept 28, 1998, page 60) how long the crisis would last, Rubin said: ''I don't know. But I don't think it's going to be resolved easily or quickly. There were substantial excesses in lending and credits, and it will take time to work its way out.''

Despite the crisis, which spread from Thailand to other parts of Asia, Russia and Latin America, Rubin and his team remained confident that the US would survive the financial storm unscathed. This was contrary to what George Soros, the international financier and hedge-fund operator, had predicted with his doomsday forecast of the downfall of the global capitalist system. The US economy has demonstrated its resilience against external turmoil as it is domestic oriented, with about 13 per cent of the GDP accounting for exports. Weakness in the global markets also flushed the money back from the periphery to the US financial centre, hence the spectacular rise of US stocks.

Along the way throughout 1998, Rubin, Greenspan and Summers walked the tight-rope to save the US economy, the last fortress of global growth.

Events in Russia and the collapse of the hedge fund, Long-term Capital Management, allowed Greenspan to cut interest rates in a series of dramatic attempts to prevent a credit crunch, which would have hit US stocks and subsequently US business activity.

Ever since that Greenspan has been cautiously trying to talk the market down to prevent the US stock market bubble from getting out of hand. The market so far has not listened to him. And Rubin set forth to preside over the formation of a new global financial architecture, revolving around the US capitalist model of trade liberalisation and free flow of capital, in view of the crisis.

Now that he is dismounting from the back of the tiger and leaving Summers to do the job, Rubin is not expected to sleep well every night until the global crisis has been effectively brought under control and until the US economy can work out a soft landing in case of a stock market crash. Summers will inherit this demanding task and will have to make sure that he is not eaten by the tiger.




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